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KOCH MATERIALS COMPANY v. SHORE SLURRY SEAL INC.

June 12, 2002

KOCH MATERIALS COMPANY, PLAINTIFF,
V.
SHORE SLURRY SEAL, INC., AND ASPHALT PAVING SYSTEMS, INC., DEFENDANTS. SHORE SLURRY SEAL, INC., COUNTERCLAIM PLAINTIFF, V. KOCH MATERIALS COMPANY, COUNTERCLAIM DEFENDANT.



The opinion of the court was delivered by: Stephen M. Orlofsky, United States District Judge.

  OPINION

INTRODUCTION

A good relationship is built on good communication. As this case proves, that aphorism is no less true of long-term business dealings than it is of marriages. One of the Defendants, Shore Slurry Seal, Inc. ("Shore"), a construction company, entered into a long-term exclusive requirements contract with the Plaintiff, Koch Materials Company ("Koch"). Midway through the term of the contract, Shore informed the Plaintiff, in rather uncertain terms, that it planned to sell most or all of its assets to the second Defendant, Asphalt Paving Systems, Inc. ("Asphalt") which is now also in the construction business. Koch, through its attorney, sought assurances that any successor would be willing and able to continue the original deal. Apparently unhappy about dealing through attorneys, rather than as businessmen, Shore's response was to refuse to give any meaningful information about the sale.

The law of contract, however, is designed to increase certainty in our dealings with one another. Otherwise, few reasonable businesses would be willing to invest in long-term cooperative agreements which, by virtue of the deal-specific investment, expose each party to significant risks of hold-up by the other. Thus, when one's contractual partner has reasonable grounds to fear that the contract will not be performed, one must answer those fears at the risk of giving the counterparty license to terminate the contract. Nor does the law, understandably, contemplate "I don't like lawyers" as an excuse for refusing to give such vital assurances.

Thus, for the reasons set forth here, and in more detail throughout the Opinion to follow, I must grant the Motion of the Plaintiff for Summary Judgment, authorizing Plaintiff to treat Shore's silence as a repudiation of the contract. I also grant much of the Plaintiff's Motion for Summary Judgment on the question of remedies, concluding that the contracts between the Plaintiff and Shore permit the Plaintiff to terminate and seek such damages as are authorized by the U.C.C. and the common law. With respect to Asphalt, Shore's putative successor, I find disputed questions of material fact related to the question whether or not Asphalt is, in fact, a successor, and therefore deny the Cross-Motions for Summary Judgment by both sides.

FACTS AND PROCEDURAL HISTORY

Koch Materials Company, the Plaintiff in this case, is a manufacturer of asphalt and other road surfacing materials. In February of 1998, Koch bought from the Defendant, Shore Slurry Seal, Inc., an asphalt plant in New Jersey, as well as the domestic license rights to a specialty road surfacing substance, known as "Novachip." Koch's purchase price was five million dollars, payable in three installments. The last and smallest of these installments, in the amount of $500,000, is not due until 2004.

As part of the sale, Shore entered into two side contracts with Koch. First, Shore and Koch signed an Exclusive Supply Agreement, under which Shore agreed that for the seven years following the sale it would purchase all of its asphalt requirements from Koch, and in any event at least two million gallons of asphalt per year. The Agreement provided that, in the event Shore purchased less than six million gallons over the last three years of the contract, the $500,000 installment payment would be reduced by the same percentage by which Shore missed the six million gallon mark. Second, Shore promised to utilize at least 2.5 million square yards of Novachip annually, either in its own business or through sublicense agreements in certain permitted regions, and to pay royalties to Koch accordingly.

For the first three years of the contract, Shore met or exceeded its two million gallon minimum under the Exclusive Supply contract, but sold somewhat less than the 7.5 million square yards of Novachip the Sublicense Agreement called for. As the contracts provided, the parties adjusted the third-year installment payment to account for the shortfall.

On March 16, 2001, Robert Capoferri ("Capoferri"), the President and sole shareholder of Shore, sent a letter to Koch's general manager. The letter provided in relevant part that:

I have decided to retire from the road construction business.
Given that the Nova Chip Sublicense Agreement is not part of this proposed asset sale, Shore Slurry Seal, Inc. will continue to exist beyond the closing date in order to primarily collect and remit Nova Chip royalties on behalf of Koch Pavement Solutions.

Pl.'s R. 56.1 Statement Exh. E.*fn1 Capoferri sent a courtesy copy of the letter to his attorney.

Koch responded on April 3, 2001, with a letter from its attorney to the attorney for Shore. After referencing the Capoferri letter, Koch's missive stated:

We have concerns about the sale because, during the next four years, Koch is owed a substantial amount of money from Shore under the February, 1998, Sale and Purchase Agreement, namely under the two schedules providing for exclusive supply and for Novachip royalties. In particular, we are concerned as to Shore's continued capacity to live up to its two million gallon per year commitment to buy asphalt emulsions and cutbacks and to meet its minimum square yardage requirements for Novachip.
Mr. Capoferri's secrecy surrounding Shore's negotiations and the terms and conditions of sale are adding to our discomfort. We do not know the prospective purchaser, the closing date or what, if any, arrangements have been made to provide for an assignment of Shore's obligations to the new purchaser. Further, we have no indication that Shore is providing, or is willing to provide any type of security to satisfy its obligations to Koch. To date we know only that the sign in front of Shore's current offices has been changed to read "Asphalt Paving Systems" and that several company vehicles are now bearing this new moniker.
Of course, once Shore has provided Koch with adequate assurance of performance of its obligations to Koch the process which we began with this letter can be terminated.

Id. Exh. F. Shore's answer, on April 6, 2001, was again a letter from Capoferri to Koch's general manager. Capoferri noted that he had conferred with his attorney, and went on to argue that:

There has not been a failure to pay amounts due or to comply with requirements under any of the agreements we have with Koch. Nothing in any of the agreements drafted by Koch prohibit me from retiring business, nor do they require me to provide any type of security, collateral, or personal guarantee of payments similar to those we imposed upon our Nova Chip sublicensees.
Regarding the assertion of secrecy contained in Mr. Hull's letter of April 3, 2001, I am not aware of provisions within our agreements requiring me to notify Koch of any business negotiations that I may be involved in.

Id. Exh. G.

Finding little comfort in Shore's response, Koch filed a Complaint in this Court seeking recognition of their right to treat Shore's failure to give adequate assurances as a repudiation of the contract, pursuant to New Jersey's Uniform Commercial Code, N.J. Stat. Ann. § 12A:2-609(1) (1962), and the common law of contracts. Koch's Complaint also alleged breach of the Exclusive Supply and Novachip Sublicense Agreements due to Shore's bad faith. On October 30, 2001, Koch amended its Complaint to add as a party a possible successor of Shore, Asphalt Paving Systems, Inc. ("Asphalt"). Koch alleges that Asphalt is liable as Shore's successor, and, alternatively, if Asphalt is not a party to the contracts between Koch and Shore, that Asphalt tortiously interfered with those contracts.

Throughout the pendency of this dispute, Shore has continued to purchase asphalt and other products covered by the Exclusive Supply Agreement ("ESA") from Koch, and to ...


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